Written by Bob Deutsch, CTA, Senior Tax Counsel
The washup from
the Banking Royal Commission conducted last year has resulted in a number of
compensation and related payments being made by the big 4 banks (CBA, ANZ, WBC,
and NAB) and AMP (“the big 5”) in relation to a number of matters. These
include compensation for:
- inappropriate advice being provided to roll over
certain existing largely satisfactory superannuation arrangements to
superannuation arrangements with one or more of the big 5;
- inappropriate advice being given in relation to having
superannuation guarantee contributions paid into a potentially
inappropriate account with one or more of the big 5;
- inappropriate advice being given in relation to
insurance arrangements concerning total or permanent disability with one
or more of the big 5, in particular where the level and nature of the
cover was inappropriate to the circumstances of the customer;
- inappropriate advice being given in relation to salary
continuance arrangements with one or more of the big 5, where again the
nature and extent of the coverage was inappropriate to the circumstances
of the particular customer;
- fees incurred by customers and paid to one or more of
the big 5 for services which they never received. Some 200,000 customers
have been identified as having been caught up in this scandal. The total
compensation is believed to be in the region of some $180 million.
|Bob Deutsch, CTA
In addition there
are refunds being paid to superannuation customers who lost money on their
retirement savings because their cash investments were eroded by what is now
agreed to be excessive fees and charges paid to one or more of the big 5.
Leaving to one
side the outrage that has accompanied the exposure of all this, it raises some
interesting questions, particularly in the context of how payments received by
affected customers are to be treated for tax purposes.
Anecdotally, I am
hearing that some refunds are being paid directly to superannuation funds,
while others are being paid to individual customers, and there does not
necessarily appear to be any particular logic for the way in which this is
Related to that,
but perhaps more importantly, is the question of whether the amounts received
are assessable in the hands of the recipient.
principle which has been applied in relation to compensation payments in the
past is that, if the payment being compensated is for an amount that, if it had
been received in the normal course, would be assessable, the compensation
payment itself is assessable.
Thus, from the
decision of the High Court in FCT v Dixon (1952) 86 CLR 540 an amount paid as
compensatory damages was held to generally acquire the character of that for
which it is substituted; Thus, it would seem compensation payments which are a
substitute for income are themselves income according to ordinary concepts,
even if they are received as a lump sum.
amounts in the form of compensation damages may be subject to assessment under
the capital gains tax provisions with some exceptions –see s 118-37 ITAA
while workable in many contexts, may be difficult to apply with any consistency
or rigour in the context of these significant compensation payments being paid
by the big 5.
Other issues also
occur to me in particular:
- If paid to a superannuation fund how is it to be
treated by the fund – if it is a non-concessional contribution (“NCC”)
will it be counted for NCC cap purposes;
- If a fee was paid to one of the big 5 and claimed as a
tax deduction when refunded does it become assessable income to the
taxpayer – see s 20-10 ITAA 1997 ff.
surprisingly, there is no class ruling in relation to any of this, nor indeed
any form of ruling from the Tax Office on how such payments should be treated.
With such a huge number of potentially affected taxpayers involved, that is a
surprising oversight. One would have expected that the big 5 would themselves
have sought some form of class ruling on behalf of all their affected
The situation is
even worse in that, again anecdotally, I am told that customers have been asked
to sign “Agreements to Release” which include a clause to the effect that the
customer will be responsible for the payment of all or any taxes that may arise
in relation to the compensation payment that is made. That is a very poor
cop-out and will only serve to further damage the reputation of the big 5 in
circumstances where sufficient damage appears to have already been done.
I wonder if any
members have been involved in this issue on behalf of clients and whether they
have sought specific advice from the ATO that may assist in resolving the
On another note,
last week I mentioned we are conducting a survey of our members to ascertain
the extent to which our membership is in agreement or not with the proposals
that are being put forward by Labor.
The link to the
survey can be found below and I would encourage all members to complete the
survey so that we have a reasonable idea of the views held by our
I pose the
statement in relation to which feedback is requested as “it will be good for
Australia” rather than it will be good for you or for the tax profession. This
is quite deliberate as I am hoping to be able to say something constructive
about what our membership thinks will be good or not for the country as a
I propose to
discuss the results of this survey in my address at The Tax
National Convention in Hobart on March 14, 2019, and the results will
be publicly available from that day on. Accordingly, I am inviting members to complete this survey by
22 February 2019. That will give us sufficient time to collate
the results and hopefully make some reasonably profound comments at the
Members, we welcome your thoughts via the TaxVine Feedback inbox.